Fed vs. Fed

The Federal Reserve has a dissident in their midst who is about to get FOMC voting rights. Philadelphia Federal Reserve President Charles I. Plosser gave one wallop of a speech making it very clear he disagrees with the Federal Reserve bailing out the Banksters and the Housing Market. He also disagrees with intervention in assets as well as giving the illusion the Federal Reserve can really do something about unemployment. From the speech:

I have suggested that the System Open Market Account (SOMA) portfolio, which is used to implement monetary policy in the U.S., be restricted to short-term U.S. government securities. Before the financial crisis, U.S. Treasury securities constituted 91 percent of the Fed’s balance-sheet assets. Given that the Fed now holds some $1.1 trillion in agency mortgage-backed securities (MBS) and agency debt securities intended to support the housing sector, that number is 42 percent today. The sheer magnitude of the mortgage-related securities demonstrates the degree to which monetary policy has engaged in supporting a particular sector of the economy through its allocation of credit. It also points to the potential challenges the Fed faces as we remove our direct support of the housing sector.

Decisions to grant subsidies to specific industries or firms must rest with Congress, not the central bank. That is why I have advocated that the Fed and Treasury reach an agreement whereby the Treasury exchanges Treasury securities with the non-Treasury assets on the Fed’s balance sheet. This would transfer funding for the credit programs to the Treasury, thereby ensuring that policies that place taxpayer funds at risk are under the oversight of the fiscal authority, where they belong. And it would help ensure that monetary policy remains independent from fiscal policy and political pressure.

Wow. Remember Section 13(3) of the Federal Reserve Act, which is how the Fed got into the bail out business? While the Dodd-Frank Wall Street Reform and Consumer Protection Act limits somewhat Section 12(3), disallowing bail outs of individual corporations, Plosser plain wants to eliminate it.

No surprise since the Federal Reserve has gotten into a very strange game of ponzi scheme profits based on all of those MBSes being held.

It is no coincidence this speech was given in Chile, land of the great Chicago Boys School of Economics, or Milton Friedman experiment land. Chile is often held up as a great example of what privatization can do by those chanting free market religion, just ignore the horrors of what really happened in Chile economically of course.

That said, all great philosophy has rings of truth:

Most economists now understand that in the long run, monetary policy determines only the level of prices and not the unemployment rate or other real variables. In this sense, it is monetary policy that has ultimate responsibility for the purchasing power of a nation's fiat currency. Employment depends on many other more important factors, such as demographics, productivity, tax policy, and labor laws.

Trade policy is conveniently left out, probably because that would go against free trade religion. That said, it is Congress, the government, this administration who really could do something about trade, the unemployment problem. The Federal Reserve cannot go up to Congress for example and demand they take action against China for currency manipulation, or mercantile trade policy.

On the other hand, raising interest rates will assuredly increase the unemployment rate at this time. Doing nothing or worse, ignoring unemployment, is almost like faith healing. All disease will heal itself if left alone. That free market mentality is one distorted economic model, with a hell of a lot of missing components, yet someone it becomes God's will anyway.

Trying to claim monetary policy should only deal with inflation and ignore all of those people out of a job, doesn't sound too swell of a direction. It's one thing to lower interest rates to help generate a gigantic housing bubble, another to raise them with 10% unemployment.